Importance of business valuation, as exemplified by ‘Shark Tank’
Have you ever heard of Shark Tank? I’m not talking about diving deep into the ocean to watch sharks lurk about from behind bars. The ABC television show broadcasts businessmen and women looking to gain investments in their homegrown products and services.
In the show, aspiring entrepreneurs have the chance to present their ideas to a panel of “sharks.” This panel of five people consists of well-known business owners who took their own ideas and grew wealthy empires themselves. Knowing how the process works from experience, the panel can choose to bid for a chance to invest in the presenter’s company or not based on what they decide it is worth. Essentially, these young entrepreneurs are receiving a business valuation.
Though going on a television show may seem like an exciting way to find out what kind of investment your company can receive, more often than not the contestants discover that what they believed their business was worth does not match what the “shark tank” thought. This is why business owners should never determine the value of their own company.
There are many ways to value your business but these are four of the most popular: book value, capitalized earnings value, fair market value, and liquidation value. All have a different purpose and take different variables into account, but they can each help you better understand the health of your business, its value in the marketplace, and the price at which you could sell.
Business valuations* play an important role in deciding what direction you should take your business. Through this process, you will see the story of your company — past, current, and potential future — in one easy to understand number. There are a couple points in a business lifecycle where you will want to know this:
- When you’re planning for retirement, you will want to know the amount of money you will gain from the sale of what is probably your biggest asset.
- You will want to know this during the process of outlining a buy-sell agreement. If you end up having to buy out your business partner’s half, you should anticipate how much to save. Setting this amount up ahead of time will require understanding the business’ value.
- A third reason is when you’re estimating any potential estate tax obligations. For some, understanding the potential tax burden and its impact on the next generation is essential for the business’ long-term success.
Seeing how your business has changed over the years can help prepare you for potential obstacles and show you what works. You may never get your moment of fame on Shark Tank, but with a financial advisor you can figure out the value of your business and work toward increasing it. I have found that financial advisors are a lot nicer than sharks anyway.
*The purpose of a business valuation is to provide a range of values that can be used to begin a discussion of how the liquidation or sale of the business could impact the financial wellbeing of each family. It is not intended, and cannot be used, to provide a determinative value for federal or state tax purposes.
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